The emission scandal at the world’s second largest auto maker, Volkswagen, has reportedly “rocked” the German political and business elites. Some have argued that it will rival the refugee challenge for Germany. Others have argued that it is a source of euro weakness. 

To be sure Volkswagen is the not first automaker that has been caught manipulating its emissions tests. Ford was found to have done a similar thing with its vans in 1997. Hyundai and Kia were fined $100 mln last year for fixing their tests. 

This is not to justify in any way what Volkswagen has done, but simply to note that there is no precedent for this turning into some sort of systemic crisis. Its impact on the euro’s exchange rate should not be exaggerated. First, consider the euro-dollar’s correlation with the DAX. Conducting the correlation on the basis of percentage change, finds the correlation is -0.39 over the past 60 days and -0.45 over the past 30 days. However, the inverse correlation is greater between the euro and the S&P 500 than it is with the DAX at -0.52 and -0.60 for the past 60 and 30 days respectively. 

Second, here is a Great Graphic (composed on Blomberg) that shows the performance of Volkswagen ADR (white line) and the euro-dollar exchange rate (yellow line). The euro rallied strongly in April through mid-May, while Volkswagen shares continued to trend lower. Similarly in the first part of June, the euro appreciated without the an interruption of Volkswagen’s downtrend. This happened again in late August. When news of the scandal first broke, the euro was already coming off from its post-FOMC bounce.   

Click on picture to enlarge

Just because the Volkswagen scandal may not be having broader capital market implications does not take away from the gravitas of the situation. Volkswagen employs 270k workers directly and even more indirectly through its suppliers. The German auto sector employs 775k people. Autos and parts are the largest German exports accounting for about 20% of roughly 200 bln euros.